In a car race, if you take a 16-year old out of his Toyota Camry and trade places with a world-class Formula 1 racer, two things are likely to happen:
- The professional racer is going to win the race in the Camry.
- The 16-year old will likely crash the Formula 1 car that will prove too advanced and too powerful to handle.
In the world of commercial real estate (CRE), it’s not the what, but the who that determines success. It’s not the property that is the most important factor in determining success. It’s who’s running the show. You can have a Camry-level property, but in the hands of a seasoned pro, that Camry can potentially reward you with higher returns than a Ferrari-level property in the wrong hands.
For investors looking into investing passively in CRE, you may have been an active investor at one time but got tired of the headaches or you may be new to all this. Whatever it is, know what to look for in a potential partner to maximize the likelihood of your success.
If you were an active investor at one time, you know what it takes to be successful:
- You need to be well-connected in your local market or market of interest. These personal and professional connections and relationships allow you to find off-market deals – the kind that offers the greatest potential for returns.
- You need to be good at analyzing deals and conducting due diligence.
- You need to be good with numbers and with financial modeling and forecasts.
- You need the infrastructure, processes, and systems in place for efficient rehab, operations, and disposition.
- You need experience and knowledge.
- You’re skilled at risk mitigation.
- You’re an expert risk mitigator.
- You have skilled legal and accounting support to ensure financial and legal compliance.
Even if you’ve never been an active investor, if you know what to look for, you should have no problems qualifying the right co-partners to embark on your CRE investing venture with.
The ideal passive investment will have managers meeting the criteria of a successful active investor. Besides, managing a private investment fund or real estate syndication will require an additional set of skills – ones involving the raising of capital and investor relationship management.
Here are some questions to ask a potential co-partner/fund manager:
- Does management have a track record of success in the asset class in which the fund proposes to invest?
- Does management have the requisite experience and knowledge in the asset class and locales in which they are proposing to invest? In other words, is this particular investment in the manager’s “wheelhouse” or is this new territory?
- Do the managers make themselves available to answer questions?
- How is management compensated?
- Is management compensation reasonable?
- Describe the investor reporting.
In the world of passive CRE investing, it’s not the what. It’s the who. The right who can make money with any property. It’s just a matter of screening and finding the right who.
Make sure that the potential co-partner is experienced, knowledgeable, and has the infrastructure and systems in place to carry out the investment objective.
If you are thorough and ask the right questions, you will have nothing to worry about when it comes to selecting the right opportunity to pursue.